IRDAI Likely To Allow Insurers to Invest 20% Funds in Public Infra SPV Debt Instruments

The Insurance Regulatory and Development Authority of India (Irdai) has proposed to allow insurers to invest up to 20 per cent of the funds in debt instruments of special purpose vehicles (SPVs) of public limited entities operating in the infrastructure sector.

A draft proposal released by Irdai suggests that insurance companies should be allowed to invest in SPVs and in projects where commercial operation and cash flows have stabilised. The proceeds from the amount invested by the insurance companies should be exclusively used to refinance debt or loans currently existing for SPVs. The underlying debt of the SPVs where insurers should be classified as standard assets in the lender’s books as per the proposal. The debt issued by the entities where insurers can invest must also have a minimum credit rating of ‘AA’.

The requirement set by the draft proposal is that the project where insurers are allowed to invest must be existing where commercial operations have commenced and cash flows have stabilised.

The regulator said that once infrastructure projects begin operations, their cash flows are more regulated and predictable, which reduces funding risks. At a stage where SPVs have begun their commercial operations, the entities typically have both operating assets and a stable revenue stream, which makes it suitable for long-term investors to gauge returns effectively.

Investing in such an asset also offers attractive risk-adjusted returns and benefits from a nearly monopolistic market position. The regulator also noted that such projects often see exits of original investors, which creates opportunities for long-term investors such as insurers to enter the front.
The insurance regulator noted that recent directions by the Reserve Bank of India have also allowed some financial institutions to provide partial credit enhancement to bonds issued by SPVs for funding all types of projects. The moves have been made to facilitate availability of rated bonds of a SPV.

The regulator said that the proposal for developing infrastructure by the government has been made along with higher capital expenditure allocations allowed in the Union Budgets to boost the economy.

“Apart from economic growth, infrastructure development is seen as a pathway for other priorities for Vision 2047. IRDAI investment regulations also give priority to the infrastructure investments and specify mandatory minimum limits under the housing and infrastructure sector,” Irdai said.